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Capital Markets Update Week of 11/26

November 26, 2024

Private-Label CMBS and CRE CLOs

Three transactions totaling $3 billion priced last week:

• BAHA 2024-MAR, a $1.5 billion SASB backed by a fixed-rate, five-year loan for Chow Tai Fook Enterprises Limited on its Baha Mar resort in the Bahamas
• BANK5 2024-5YR12, an $867 million conduit backed by 27 five-year loans secured by 147 properties from BofA, Morgan Stanley, JPMorgan, and Wells
• COMM 2024-CBM, a $627 million SASB backed by a fixed-rate, five-year loan for a joint venture between Clarion Partners and Michigan Retirement System to refinance a portfolio of 52 Courtyard by Marriott hotels

According to Commercial Mortgage Alert, two transactions totaling over $1.5 billion are currently in various stages of marketing.

By the numbers: Year-to-date private-label CMBS and CRE CLO issuance totaled $104.5 billion, 162% ahead of the $39.9 billion for the same period last year.

Spreads Stable

• Conduit AAA and A-S spreads were unchanged at +85 and +115, respectively. YTD, AAA and A-S spreads are tighter by 31 bps and 50 bps, respectively.
• Conduit AA and A spreads were unchanged at +145 and +175, respectively. YTD, AA and A spreads are tighter by 80 bps and 200 bps, respectively.
• Conduit BBB- spreads were tighter by 25 bps at +450. YTD, BBB- spreads have tightened by 450 bps.
• SASB AAA spreads were unchanged in a range of +105 to +130, depending on property type. YTD, they have narrowed from a range of +143 to +212.
• CRE CLO AAA and BBB- spreads were unchanged at +160 / +165 (Static / Managed) and +450 / +475 (Static / Managed), respectively. YTD, they have narrowed from +200 (Static / Managed) and +600 (Static / Managed).

Agency CMBS

• Agency issuance totaled $3.6 billion last week, consisting of $2.1 billion in Fannie DUS, $1.2 billion in Freddie K, Q, and Multi-PC transactions, and $280.3 million in Ginnie transactions.
• Agency issuance for the year totaled $103 billion, 5% lower than the $108.5 billion for the same period last year.

The Economy, the Fed, and Rates…

Economic Data & Outlook

• Consumer Sentiment Reflects Political Divide: The University of Michigan's final November sentiment index rose to 71.8 from 70.5 in October, but the headline masks a stark partisan divergence following Trump's election victory. Republican sentiment surged to its highest level since 2021, while Democratic sentiment plunged to a one-year low.
• Labor Market Shows Mixed Signals: Initial jobless claims fell by 6,000 to 213,000 in the week ended Nov. 16, suggesting employers are retaining workers ahead of the holidays. However, continuing claims climbed to 1.91 million, a three-year high, indicating that while layoffs remain low, those who do lose jobs are taking longer to find new employment. The dichotomy points to a gradual cooling in labor market conditions rather than a sharp deterioration.
• Consumer Resilience Continues: Despite political uncertainty, consumer activity remains robust. Expected record Thanksgiving air travel, declining gasoline prices (expected to fall below $3 per gallon), and increasing restaurant spending suggest household confidence remains intact. Despite concerns about diminishing savings, personal savings remain positive at about $1 trillion a year. Matt Klein of The Overshoot observed, "When asset values go up a lot, people save less," but noted this is not happening now despite high asset prices.
• Growth-Trade Policy Tension: A fundamental tension is emerging between Trump's growth agenda and trade policies. The Penn Wharton Budget Model estimates Trump's proposed tax policies could boost the annual trade deficit by about $800 billion over the next decade. As The Wall Street Journal's Greg Ip notes:

"Faster growth and bigger budget deficits boost imports and the dollar, widening the trade deficit and making U.S. manufacturers less competitive. Tariffs dent consumer spending and business confidence." 

Fed Policy & Inflation Outlook

• Rate Cut Debate Intensifies: Fed officials are wrestling with competing priorities as they approach their December meeting. Richmond Fed's Tom Barkin warns the U.S. is "more vulnerable to inflationary shocks than in the past," while Chicago Fed's Austan Goolsbee sees rates moving "a fair bit lower" over the next year. This divergence reflects the broader challenge of balancing inflation risks against economic momentum.
• Inflation Plateauing: The core Personal Consumption Expenditures (PCE) price index has hovered around 2.7% over the past six months. Fed Governor Michelle Bowman expressed concern: "We have seen considerable progress in lowering inflation since early 2023, but progress seems to have stalled in recent months."
• Housing Inflation: Shelter costs continue to drive inflation, with housing and utilities up 5% year-over-year in September. Federal Reserve Bank of Boston President Susan Collins highlighted the issue: 

"Shelter inflation is high because rents for existing tenants are still catching up to the past surge. While this catch-up process may continue to be slow and uneven, it does not raise concerns for me about the durability of inflation's trajectory back to 2% - as long as new tenant rent inflation remains subdued and overall inflation expectations stay well-anchored."

• Political Transition Complicates Outlook: The Fed faces a delicate balancing act with Trump's return to the White House. His proposed combination of tax cuts and tariffs presents particular challenges for monetary policy. As JPMorgan's Bruce Kasman notes:

"Policymakers here are going to have to decide what their priorities are and how to balance things... We're generating a dynamic that is hurting foreign and helping U.S. growth and pushing the dollar up." 

• Fed Framework Review: The Federal Reserve announced details of its upcoming framework review, focusing on communication tools but maintaining the 2% inflation goal. Fed Chair Jay Powell stated:

"We are open to new ideas and critical feedback and will take on board lessons from the last five years."

• Rate Cut Expectations: The Fed has reduced interest rates twice this year – a half-point cut in September and a quarter-point reduction this month – bringing the benchmark rate to a range of 4.5% to 4.75%. The market-implied odds of another quarter-point rate cut on December 18 are currently about 60-40.

Treasury Yields & Market Reaction

• Yield Movements: The benchmark 10-year Treasury yield ended the week at 4.4%, more than three-quarters of a percentage point higher than its mid-September low, with yields across maturities above 4%. The 2-year yield was up 7 bps last week to 4.37%.
• Bond Market Signals: In an interview for Bloomberg Television, PIMCO portfolio manager and head of asset allocation Erin Browne said she expects the yield curve to steepen as the prospect of bigger deficits curbs demand for long-term debt, while shorter maturities may benefit.
• Year-End Funding Stress Emerges: An unusually early surge in year-end funding pressures has emerged in money markets, with overnight repo rates reaching concerning levels. Bank of America's Mark Cabana warns that "dealer balance sheets today are quite full," suggesting potential market volatility ahead. The pressure is particularly acute in equity-backed repo financing, which has swelled to its highest level since 2013.

You can download CREFC’s one-page MarketMetrics with statistics covering the economy and the CRE debt capital markets here.

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